Question 3: Use the following historical returns of stocks A and B and answer the questions. Show the step-by-step calculation and circle your answer. Then use your results from questions a, b, c, d and fill out the table for Mean, Standard Deviation (STDEV), Coefficient of variation (CV), and Portfolio.

Year

Stock As Returns (%), rA

Stock Bs Returns (%), rB

Portfolio (%)

2013

-18

-14.5

2014

33

21.8

2015

15

30.5

2016

-0.5

-7.6

2017

27

26.3

Mean

STDEV

CV

a. Calculate the average rate of return for each stock during the period 2013 through 2017.

b. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would the realized rate of return on the portfolio have been each year? What would the average return on the portfolio have been during this period?

c. Calculate the standard deviation of returns for each stock and for the portfolio.

d. Calculate the coefficient of variation for each stock and for the portfolio.

e. Calculate the correlation between the returns on A and B. Are they positively or negatively correlated? Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why? Give a short answer in 1-2 sentences.

Year Stock A's Returns (%),r Stock B's Returns (%), r, Portfolio (%) 2013 -18 - 14.5 2014 33 21.8 2015 15 30.5 2016 -0.5 -7.6 2017 27 26.3 Mean STDEV CV